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Monday, March 12, 2018

Roger Farmer — The Household Fallacy

My new working paper, joint with Pawel Zabczyk, is out now as an NBER working paper, a CEPR discussion paper and a NIESR discussion paper. Here is the abstract:We refer to the idea that government must ‘tighten its belt’ as a necessary policy response to higher indebtedness as the household fallacy. We provide a reason to be skeptical of this claim that holds even if the economy always operates at full employment and all markets clear. Our argument rests on the fact that, in an overlapping-generations (OLG) model, changes in government debt cause changes in the real interest rate that redistribute the burden of repayment across generations. We do not rely on the assumption that the equilibrium is dynamically inefficient, and our argument holds in a version of the OLG model where the real interest rate is always positive....

When I saw the title I thought he got it. Not!

The real household fallacy is equating the currency issuer with users of the currency.

In what has been the most stunning admission by Janet Yellen so far during her press conference, the Fed Chair said that "we don't fully understand inflation" and added that the "shortfall of inflation this year is more of a mystery."